The ViewSliding dollar is the new painkiller for global markets

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The weaker dollar has been a major factor behind the loosening of financial conditions. Photo: Reuters

Published: 11:04am, 8 Jan 2018Updated: 10:52pm, 8 Jan 2018

Ever since the 2008 financial crisis, the ultra-loose monetary policies of the world’s main central banks have acted as a painkiller, helping stabilise markets and providing a fix for investors and traders desperately searching for higher-yielding opportunities at a time of historically low – and in some cases negative – interest rates.

While money is still cheap, with the Bank of Japan and the European Central Bank yet to call time on their aggressive quantitative easing programmes and the Federal Reserve raising interest rates at a gradual pace, a new source of relief has grown in importance over the past year: the sliding US dollar.

A year ago, the overwhelming consensus in markets was that the greenback would continue to strengthen following the election of Donald Trump as US president, whose pro-growth policies were expected to boost growth and inflation. Yet as the so-called “Trump trade” quickly unravelled, the dollar index – a gauge of the greenback’s performance against a basket of its peers – tumbled, falling 10 per cent last year, its worst year since 2003.

The euro sign landmark outside the headquarters of the ECB in Frankfurt. If the euro keeps rising, inflation and growth in Europe could slow, making the ECB even more reluctant to withdraw stimulus. Photo: Reuters

The weaker dollar has been a major factor behind the loosening of financial conditions, along with the surge in global equities, the dramatic tightening of spreads on corporate debt and, until recently, the decline in government bond yields.

The greenback’s retreat, and the build-up of speculative bets against the dollar, is turbocharging a rally that was given added impetus by a series of bullish surveys last week pointing to the strongest synchronised global economic upturn since 2010.

The weaker dollar’s impact on asset prices and market expectations is most pronounced in the following areas: